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View all search resultsAs Indonesia rapidly embraces digital considerations as an integral part of its business strategy, open banking is fast becoming a key consideration in its journey to remain competitive and relevant
s Indonesia rapidly embraces digital considerations as an integral part of its business strategy, open banking is fast becoming a key consideration in its journey to remain competitive and relevant. In fact, as part of Indonesia’s aim to support a digital future, it is looking at open banking as one of the five key thrusts under its Indonesia Payments System 2025 Vision (SPI 2025). The SPI 2025 will look for ways to enable closer collaboration between banks and fintech toward faster digital transformation.
The Boston Consulting Group (BCG) sees that the adoption of open banking can create tremendous opportunities for transforming customer experience, driving innovation and securing a bank’s relevance and competitiveness, but players need to acknowledge its challenges. Banks can use their position as a trusted advisor to motivate customers to expand their horizons on the concept of open banking and try new offerings that offer convenience.
Open banking essentially looks to integrate its own banking platforms with other third party platforms using open application programming interfaces (APIs). This enables banks to disclose customer information to third parties safely and glitch-free interlinks between parties for convenient transactions and smooth delivery of banking services.
Customers can also experience an enriched customer journey as they can tap on an expanded range of offerings arising from the incorporation of third party services on banking platforms. By the same token, third party platforms who have their own customers can also offer them a conduit to banking channels seamlessly and the creation of new products for customers.
As the platforms leverage on transaction data of the customer, personalized offers can be made in real-time and payments from the customer’s bank account, as payment functionalities can be embedded in the third party applications.
Open banking can open opportunities for banks and third parties to look at new modes of interaction and business models. However, it is important to put customers at the heart of its open banking strategy and look at initiatives that fulfil their needs, particularly an efficient experience through their always-connected digital media devices.
We believe speed of evolution of open banking adoption is led by three factors — regulation, fintech landscape and the fundamental tech maturity of banks to adapt.
Europe is leading the charge for open banking with its European Union Payment Services Directive 2 (PSD2) regulatory framework. Under this framework, data can flow securely between banks and nonbanks, creating an established standard for digital payments. These standards prioritize customer protection with customer consent, data security and strong customer authentication (CSA) requirements.
By September, all companies within the EU are expected to comply with PSD2’s Regulatory Technical Standard for strong CSA and common and secure open standards of communication. With an integrated market for digital payments, the playing field will be levelled and banks and nonbanks can compete for any customer that uses the payments system.
In Asia, the fintech sector, based on its intrinsic advantages — fast moving, tech and engaged customer base — has been growing fast and posing a strong challenge to banks in some spaces. Several leading banks in Indonesia have taken the initiative through the setup of fintech funds/incubators that allow integration through open APIs. Banks in India, for example, most have established basic fundamentals to allow for Open APIs
Currently, there are a whole host of nonbank players who are looking at disrupting the marketplace for a share of the revenue pie. This number is set to grow, thereby increasing fragmentation. Banks need to think about changing their course, otherwise they risk getting hit on several fronts as open banking evolves.
A BCG study shows that banks that actively pursue open banking as a strategy have the potential of increasing revenue by 5 to 20 percent for retail banking, and 5 to 20 percent for corporate banking. On the flipside, those that don’t actively engage in open banking may see a risk of revenue drop of 20 to 30 percent for retail banking and 15 to 20 percent for corporate banking.
For banks, the way to think about this is around two questions – 1) Does open banking increase customer stickiness, thereby higher fundamental revenues and; 2) Is there a data monetization revenue model for banks. On the former, it has been established many times with the CASA/transactions use-case where highly-engaged consumers, over time, have higher average CASA balances. On the latter, it is yet to be proven but we are in the early stages.
That said, banks need to move in the "open" direction as they run the risk of being seen as commodities with easily accessible alternatives. This can lead to third party intermediaries commoditizing banks and decreasing its ability to set prices or generate sales, thereby putting the client interaction channel at risk.
With open banking, any business that accepts payment on behalf of a customer becomes a competitor. Partners that work with banks today, such as those that provide enterprise resource planning (ERP) to manage data and handle transactions, will become competitors of the future as they take an increasing share of banks’ client interface.
Implementing open banking requires the bank to have governance oversight on six key building blocks. These include stakeholders’ engagements, clear responsibilities and mandates, strategic engagement with developers, agile IT capabilities, a mobilized and aligned organization and clear visibility of intended results.
Banks need to look at technology as a means to empower their digital banking aspirations in an open marketplace. They need to move away from their current silo-centric IT initiatives toward a more client-centric and open API platform that looks at unlocking scale and potential while protecting the customer relationship.
Having a clear vision and working in collaboration with the right partners is as important as changing the mindset internally within the organization.
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Tushar Agarwal is a Partner with Boston Consulting Group, Jakarta.
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